Christmas is one of the best times to be in the self-storage business. For many, it’s the celebration of American consumerism, which is the powerful engine behind the storage concept. It’s also a time in which most Americans are reminded of the need for their storage unit, as they pull out the artificial tree, ornaments, and yard art. Finally, it’s the driving force for the need for even larger units, as more gifts are received, more items need to be stored. But there’s another side to Christmas. That’s the side that promotes being kind to your fellow man and spending time with friends and family. And it’s a good time to reflect on the year and say “thank you” to the special folks in your life. So we’d like to take this opportunity to say “thank you” for being part of our extended self-storage family. Have a Merry Christmas!
Memo From Frank & Dave
You Don’t Have To Be Einstein To Make High Returns In Self-Storage
Albert Einstein was a great scientist, who created many of the theories of the Universe that we embrace today. His Theory of Relativity is considered one of the most masterful pieces of science since Galileo let those two lead weights fall form the Leaning Tower of Pisa to unlock the mystery of gravity. However, most of Einstein’s theories are so complicated that nobody short of a physics PHd can understand them. Self-storage facilities, on the other hand, are easy to comprehend and make high rates of return even if you don’t have the ability to understand the curvature of time or how a nuclear bomb detonates.
Step one: find a property that has good underlying dynamics
What makes a self-storage facility a good deal? It’s pretty easy. You need to be a market where there’s a big population base with a reasonable amount of storage supply to meet that demand. You need to have a good location. It needs to be built to a decent standard, with no expensive capital needs to repair. It needs to have a legal permit. It needs to have good street frontage and a very visible sign. It needs to be in a market where occupancy is strong. And the price needs to be based on the existing net income, and that net income based on a rent which can be increased over time. These are not rocket science. This is not like picking the best idea off Shark Tank. It’s basic real estate 101 and anyone can size up a property and spot a winner from a loser with a moderate amount of education on the topic.
Step two: buy it at a cap rate that is around two points higher than the interest rate on your loan
What makes money in real estate is “leverage” – which means borrowing 70% to 80% of the purchase price in a loan form a bank. To hit a 20% cash-on-cash return, all you need is about a three point spread. So a self-storage facility that you buy at a 9% cap rate and finance at 6% will produce a 20% cash-on-cash return. Let’s prove this point right now. If you bought a self-storage facility for $1 million that produces $90,000 per year of net income (a 8% cap rate) and finance 80% of that at 6% at a bank, then here’s how the numbers compute: $90,000 minus ($800,000 x 6%) = $42,000, which is around an 21% cash-on-cash return on your $200,000 down payment. Not too difficult to understand, right?
Step three: follow the key drivers to profitability and hit or exceed your budgets
Once you have the road map to hit great numbers, you need to make sure that you stay on that road. That means keeping a careful watch over occupancy, rent levels, and costs. When you buy the facility, you should have a reliable budget. Stay on that budget. Fight to beat every estimate on every line item. Try to beat your forecast on occupancy. Raise the rents a little more than you hoped. Keep costs down a little more than you thought you could. That way there will be no surprises – except for happy ones.
Step four: watch for the right time to sell or refinance
Once you have your self-storage facility running as you want it, keep an eye out for a great chance to refinance or sell it. The economy runs in cycles, as do real estate values. When you see an up cycle in values, harvest your crop. You can use the profits to buy another, larger facility or even a couple of them. This will put even more capital to work at a high rate of return. The same is true of refinancing. We frequently do cash-out conduit refinancing, where we get all of our cash back out and still own the property. If performed perfectly, you can own a self-storage empire using this tactic, with the same capital used over and over.
Einstein never owned a self-storage facility. If he had, he could have probably put the winning formula into a scientific equation. We prefer to keep it simple and in words.
December Is A Good Month To Increase Your Marketing
We all know that summer is the prime moving season in the U.S., and an important time to market your self-storage facility to increase occupancy. But don’t forget that the Holiday Season is another important point in the year to ramp up your marketing and occupancy. Here’s why.
It’s a season dedicated to “stuff” in resulting in higher storage demand
Regardless of your religious affiliations, the Holiday Season is statistically the time of year in which a huge amount of material goods are purchased. In fact, it represents 20% of the retail sales for the year. And that does not even include all the “gifts” that adults give themselves, such as boats and jet skis. When people receive this windfall of material goods, they have to have an immediate place to store them. So many, many people are in the market for a self-storage unit as a result of the Holidays.
It’s a time of year in which people are formulating their annual budgets
If you are offering pricing specials, the Holidays are also a time of year in which people are designing their budgets, and are always looking for ways to pare down their monthly cost. You may be able to increase market share during this time of year as many people are open to cutting costs and taking advantage of specials. A free month of rent might lock you in 11 more at full price.
It’s a time of year in which people are faced with the difficulty of accessing their closet and garage
Many of our customers come to us as the result of getting fed up with their current storage conditions. Have you ever tried to get the artificial Christmas tree out of your attic? Or boxes of ornaments out of a closet in which they are buried at the bottom of a pile the size of a SUV? That storage in your house that sounded so possible in theory often does not work out at all in practice. And that leads many, many people to searching for a new method of storage as a replacement. One in which they don’t break an arm or leg to retrieve it.
It’s a time of year in which people are willing to spend some money
Even Scrooge gets a little looser on finances during the Holiday Season. You can’t help it. All you see around you is people spending money, so you get conditioned to think “it’s OK, it’s Christmas time”. That feeling of big spending also applies to self-storage units. People not only get fed up with trying to climb Mount Everest to get to their Christmas lights, they also think “it’s Christmas and I’m giving myself the gift of a storage unit”.
The Holidays are a great time to increase your self-storage occupancy – and marketing is the first step. If you have not done so already, it’s time to step up your game.
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Where Does All This Stuff Go? Why The Holidays Are Your Best Friend
Have you ever looked at all the stuff in the mall and thought “so where does all this stuff end up”? Some of it goes into the trash. The really bad sweaters get re-purposed for gifts to people that you really don’t like. Some of it gets consumed, like fruit cakes and chocolates. But a good portion of it ends up in a self-storage locker. In effect, the holidays are a great asset for the self-storage industry. So when you’re fighting traffic at the mall, or annoyed by the lack of any radio programming except for Christmas tunes, remember that this mass of consumerism is a huge driver to occupancy and, unlike the retailers, the benefits go on month after month. Santa probably is the largest self-storage user in the North Pole, and he has the golden touch at all points south.
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